This article is from the Australian Property Journal archive
All good things must end is the forecast from Prudential Real Estate Investors, which expects United States real estate investment returns to begin slight decline in 2006.
According to the Prudential Real Estate Investors 2006 U.S. Quarterly Market Perspective, private, unleveraged real estate investments, as measured by the NCREIF Property Index is expected to fall to between 12% and 15%, down from 20% returns in 2005.
“As property appreciation begins to moderate this year. PREI anticipates that total returns could decline further into 2007,” PREI Research’s managing director Youguo Liang said.
"All good things must end, including the terrific run that real estate has enjoyed over the past several years.
"Real estate should continue to perform well in 2006, however, and it remains attractive to investors, particularly with property fundamentals improving and new supply still years away in most markets and property types,” he added.
According to the report, the most immediate risk to the outlook for the commercial real estate market over the next year or two remains the potential fallout from a slowing housing market, especially the condo market.
“The housing market slump affects the apartment market most directly and, in the near term, declining home affordability and continued job growth should be positive for apartment demand.
“Renting is already more economically attractive in some markets, including San Diego and elsewhere in Southern California. However, given the prospect for a weaker condo market and higher operating expenses, market selection will be critical for multifamily investors,” the report said.
“A slowdown in the housing market will reverberate through the economy, including commercial real estate,” Yougou said.
Within commercial real estate, the retail sector could also feel the effects of a slowdown in the housing market.
“Many analysts, for example, expect retail sales growth to slow this year. Total returns for retail properties dipped below office properties during the second half of 2005 for the first time since 2001. Retail’s success has depended, in part, on the refinancing activity that has fueled consumer spending, but that trend should decline as interest rates climb,”
However, the report expects the office sector to outperform retail as office fundamentals continue to improve.
“ Vacancy rates in some cities, such as New York and Washington, D.C., have fallen to single digits, setting the stage for strong rent growth, and perhaps even rent spikes, over the next few years,”
“Within the industrial sector, demand for warehouse space should remain healthy in 2006 as businesses gradually increase spending and rebuild inventories. That demand continues the sharp rise of tenant and investor demand in 2005,”
Meanwhile the hotel sector will continue to enjoy a positive outlook for the next year or two, following an impressive recovery in 2005, especially in the luxury segments of the business.
“The industry should see little new supply, and room inventories should contract in a few markets thanks to condo conversions, allowing hotel operators to generate recent growth of 20% or more through 2007,”
Yougou said a new supply of commercial mortgage-backed securities in the first quarter could provide an interesting test of how deep investor demand will be this year.
“It appears that the increasing supply of CMBS and larger deal sizes, among other factors, have improved liquidity in the CMBS market and have helped broaden the investor base.
“Higher valuations and narrow yield spreads mean that increased volatility among Real Estate Investment Trusts will likely persist this year as short-term traders move in and out of the REIT market,” he added.
By Adam Parsons
